US 7805346 B1
A method comprising issuing, buying and/or selling pass-through certificates issued by an issuer. The pass-though rate payments on the certificates may be funded by payments to the issuer by one or more borrowers on a mortgage loan. The certificates may have a legal maturity and an expected maturity that is before the legal maturity. The payments owed by the borrowers on the mortgage loan may be interest only until the expected maturity. The one or more borrowers have a revolving credit facility with a liquidity provider, pursuant to which the liquidity provider commits to make advances to the one or more borrowers from time to time as necessary in order for the one or more borrowers to make timely payments of interest on the mortgage. The mortgaged property may comprise timberlands.
1. A computer-implemented method relating to pass-through certificates, the method comprising:
determining, by a computer system, following issuance of the pass-through certificates by an issuer, whether a cash trap condition exists with respect to the pass-through certificates, wherein:
pass-though rate payments on the certificates are funded by payments to the issuer by one or more borrowers on a mortgage loan for a reference property;
the reference property comprises harvestable timberlands; and
the mortgage loan requires that during a cash trap condition, all excess cash flow of the one or more borrowers is to be deposited in a cash trap reserve account; and
wherein determining whether the cash trap condition exists comprises:
determining, by the computer system, whether an under-harvest condition exists for the reference property and whether an over-harvest condition exists for the reference property, wherein the cash trap condition exists when any one of a plurality of disjunctive conditions exists, wherein the disjunctive conditions comprise (i) an over-harvest condition for the reference property and (ii) an under-harvest condition for the reference property,
wherein determining whether an under-harvest condition exists comprises determining, by the computer system, whether both (a) a total volume of harvested timber over one or more time periods meets a corresponding under-harvest threshold for the reference property for the one or more time periods and (b) a debt service coverage ratio (DSCR) for the certificates is at or below a DSCR under-harvest threshold value, and
wherein the computer system is in communication with a database that stores data about timber harvested from the reference property, and wherein the computer system comprises a cash-trap determination module for determining whether the cash trap condition exists based on the data in the database.
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determining, by the computer system, whether the under-harvest threshold is met by determining
(i) whether a total volume of timber harvested from the harvestable timberlands during a most recent calendar year is less than a minimum threshold percentage of a base harvest for the most recent calendar year; or (ii) whether a total volume of timber harvested from the harvestable timberlands during five most recent calendar years is less than a minimum five year threshold percentage of a base harvest for the five most recent calendar years.
5. The method of
determining whether the over-harvest condition exists comprises by determining, by the computer system:
(i) whether the total volume of timber harvested from the harvestable timberlands during the most recent calendar year exceeds the base harvest by a maximum threshold percentage for the most recent calendar year; (ii) whether the total volume of timber harvested from the harvestable timberlands during five most recent calendar years exceeds a maximum five year threshold percentage of the base harvest for the five most recent calendar years, or (iii) whether a total volume of timber harvested from the harvestable timberlands from a closing date through the end of the most recent calendar year exceeds the base harvest for a time period from the closing date through the end of the most recent calendar year by more than closing date thresholds.
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the mortgage loan has a plurality of components; and
each component is evidenced by a promissory note executed by the one or more borrowers.
In a common securitization scheme, an issuer issues securities backed by the cash flow and other economic benefits generated by a pool of assets (usually loans or other debt instruments). Typically, the issuer is a special purpose entity or some other type of entity which is bankruptcy remote from the sponsor, or originator, of the securitization. The sponsor sells its interest in receivables to the issuer in exchange for a payment from the issuer. This allows the sponsor to make adjustments to its balance sheet, tranche the debt to reach different investment groups, or originate or service more receivables. After acquiring the sponsor's interest in receivables from the sponsor, the issuer issues securities backed by those same receivables.
Securitizations in the timber industry are known, but are rare. In such past timberland securitizations, the issued securities were backed by the sale of timber products from the timberlands. Some of these securitizations have not performed well. The securities in the past timberland securitizations were not highly rated by the rating agencies (i.e., never higher than an A rating). Accordingly, there exists a need for a timberlands securitization structure that allows the securities to be highly rated and that also provides other attractive features to potential investors.
In one general aspect, the present invention is directed to a securitization structure that is particularly useful for the securitization of mortgage payments on timberlands. In the securitization structure, one or more borrowers obtain a mortgage loan on a reference property (e.g., timberlands). For example, the borrowers may use the mortgage loan to finance the purchase of the timberlands. The mortgage loan is sold to an issuer that issues securities to investors, where the proceeds from the offering are used to purchase the mortgage loan.
The securities may be fixed-income debt instruments, such as pass-through certificates. In such an embodiment, the pass-though rate payments on the certificates may be funded by payments to the issuer by the borrowers on the mortgage loan. The certificates have a legal maturity and an expected maturity that is shorter than the legal maturity. Preferably, the expected maturity is significantly shorter than the legal maturity, such as at least ten or more years shorter than the legal maturity. For example, if the legal maturity is thirty years, the expected maturity may be ten years. The payments owed by the borrowers on the mortgage loan may be interest only until the expected maturity. The borrowers also have a revolving credit facility with a liquidity provider, pursuant to which the liquidity provider commits to make advances to the borrowers from time to time as necessary in order for the borrowers to make timely payments of interest on the mortgage.
In various implementations, it is expected that the mortgage and the certificates are to be refinanced before the end of the expected maturity. If not, all cash flows of the borrowers may be used to amortize the debt in a “full turbo” after the expected repayment date (“ERD”) if the mortgage and the certificates have not been refinanced. The certificates may also pay contingent additional interest if the certificates are not refinanced by the ERD.
In other general aspects, the present invention is directed to issuing, buying, and/or selling the certificates. Embodiments of the present invention are also directed to underwriting the issuance of the certificates.
Various embodiments of the present invention are described herein by way of example in conjunction with the following figures wherein:
The mortgage loan may be a fixed-rate, monthly pay, non-recourse mortgage loan entered into on the closing date of the transaction. The mortgage loan may have several components, each component bearing a different interest rate. Each component of the mortgage loan may be evidenced by a separate promissory note executed by the borrowers 12 on a joint and several basis (when there is more than one borrower 12). The promissory notes collectively may be secured by (i) mortgage and deeds of the issuer 16 creating first priority liens on the interest in the mortgaged property held by the borrowers 12 and (ii) a security interest in other related collateral.
The securities 18 may also be issued on or about the closing date. The lender 14 may assign the mortgage loan to the issuer 16 concurrently with the issuance of the securities 18.
In various embodiments, the securities 18 may be debt instruments (e.g., bonds) that pay either a fixed or floating interest rate. In addition, the issuer 16 may issue numerous classes of the securities 18, each class having a different subordination level. The least subordinate (most superior) class may pay the lowest interest rate and the most subordinate (least superior) class may pay the highest rate. According to various embodiments, by virtue of aspects of the structure described herein, one or more of the more senior classes of the securities 18 may have a rating of A or higher.
The number of classes of securities 18 issued by the issuer 16 preferably corresponds to the number of components in the mortgage loan, such that each class of securities has a corresponding component of the mortgage loan. Each class of the securities 18 may also pay a pass-through rate equal to the interest rate on its corresponding component of the mortgage loan plus trustee and servicing fees. In that sense, the securities 18 may be considered pass-through certificates. Distributions to the investors 20 on the securities 18 may be made, to the extent available, on period distribution dates.
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There may be an expectation that the mortgage loan will be refinanced by or before the end of the expected term. If they are not, the borrowers 12 may be required to make periodic (e.g., monthly) principal payments in respect of the mortgage loan (in addition to the interest payments that are due). According to various embodiments, the principal payments that are due after the expected term may be equal to the greater of (i) all excess cash flow of the borrowers or (ii) an amount sufficient to amortize the loan based on an amortization schedule for the number of years remaining in the legal term of the securities 18 (for example, if the legal term is thirty years and the expected term is ten years, the amortization schedule may be a 20-year schedule).
Further, according to various embodiments, if the securities 18 are not paid off by the end of the expected term, the investors 20 are entitled to receive contingent additional interest after the end of the expected term on the securities 18. The contingent additional interest may be, for example, an additional 5% or more in interest for each class of securities 18. For this reason, there is an incentive to refinance the mortgage and pay off the securities 18 before the end of the expected term.
As mentioned above, the reference property for the mortgage loan preferably comprises timberlands. The borrowers 12 may receive payments due to the harvest of timber on the timberlands and such payments may be used to cover the operating costs of the timberlands and the borrowers' payment obligations to the issuer 16 under the mortgage loan. Because timber prices are subject to market fluctuations, the borrowers 12 may enter into a revolving credit facility with a liquidity provider 24. The credit facility is preferably entered into on or prior to the closing date for the transaction and requires the liquidity provider 24 to commit to make advances to the borrowers 12 from time to time as necessary during the effective term of the credit facility in order for the borrowers 12 to make timely payments of interest under the mortgage loan. The liquidity provider's commitment (or “commitment amount”) is preferably equal to the amount of interest expected to be payable on the mortgage loan over a defined period of time, such as six months. The liquidity provider 24 preferably has a high credit rating (e.g., a credit rating indicating stability). Also, under the credit facility the liquidity provider 24 may be paid a floating rate (e.g., LIBOR+x %) for outstanding advances.
According to one embodiment, the term of the credit facility may be one year, automatically extendable thereafter for one-year periods, except upon notice from the liquidity provider 24. If the liquidity provider 24 does not agree to extend, the borrower 12 will be required to either (i) enter into a replacement credit facility on substantially the same terms or (ii) request an advance (a “non-extension advance”) from the liquidity provider 24 prior to the expiration of the existing credit facility in an amount equal to the excess of (A) the commitment amount under the existing credit facility over (B) the aggregate amount of each interest advance by the liquidity provider 24 then outstanding. The proceeds from any non-extension advance may be deposited in an account and subsequently withdrawn by the borrowers 12 for the purpose of paying interest on the mortgage loan as needed.
A guarantor 26, which may be the parent of the borrowers 12, may guarantee repayment of the mortgage loan by the borrowers 12. The guarantor 26 may be a special purpose entity (SPE) established for the sole purpose of holding the direct and indirect equity interests of the borrowers 12. The guarantor 26 may pledge those interests as security for the guaranty. The guaranty may provide an alternative to foreclosure of the mortgage loan, not credit support. Accordingly, the guarantor 26 preferably owns no material assets other than the equity interests in the borrowers 12. Upon the occurrence of a default on the mortgage loan, the issuer 16 may be entitled to exercise with respect to those equity interests all rights and remedies available to a secured party under the Uniform Commercial Code, including foreclosing on such equity interests.
In the case where the mortgaged property is timberlands, a manager (not shown) may manage the timberlands for the borrowers 12. The manager may be, for example, an affiliate of the borrowers 12. The manager's duties may include (i) marketing the timber and administering the sales thereof, including negotiation of price for timber with buyers thereof, (ii) developing and implementing management and harvesting plans for the timberlands, including schedules for harvesting, planting and fertilization, etc.
The borrowers 12 preferably establish one or more deposit accounts into which proceeds from the sale of timber and other timber-related products from the mortgaged timberlands are to be deposited. The deposit account(s) may be under the control of the issuer 16.
Next, the interest on the securities 18 may be paid in order of their seniority. In this example, there are four classes of securities 18: Class A, Class B, Class C and Class D. Thus, at step 48, the interest on the Class A securities is paid. At step 50, the interest on the Class B securities is paid. At step 52, the interest on the Class C securities is paid. And at step 54, the interest on the Class D securities is paid. Then, assuming for the sake of the illustrated example that the mortgage was not refinanced by the ERD, the amortization payments on the classes of the securities 18 may be paid in order of the seniority at steps 56-62.
Then, at step 64, assuming there are still remaining funds, a reserve account may be funded up to a predetermined level based on performance, such as debt service coverage ratio and volume of harvest. Next, at step 66, if there are still remaining funds, excess cash flow may be used by the borrowers 12, including for dividend payments to the equity owners of the borrowers 12.
The borrowers 12 may also establish a cash trap reserve account, managed by the issuer 16, to reserve excess cash flow while any cash trap condition is continuing. In various embodiments, during the continuation of a cash trap condition and until the expected repayment date, all excess cash flow of the borrowers 12 may be deposited in the cash trap reserve account. On each distribution date, for so long as the cash trap condition continues to exist, the funds on deposit in the cash trap reserve account may be applied pursuant to the defined waterfall priority, such as described in connection with
In embodiments where the securitization structure is used to securitize mortgage payments on timberlands, the manager of the mortgaged timberlands may prepare a harvest plan (the “Base Harvest Plan”) for the timberlands. The Base Harvest Plan preferably sets forth a base harvest, which is, with respect to any time period, the total volume of timber to be harvested from the timberlands during the period. In that connection, a cash trap condition may be considered to exist as of the end of any calendar quarter and prior to the expected repayment date if any of the following conditions has occurred and is continuing:
According to various embodiments, the over-harvest condition may be considered to exist when:
An under-harvest condition may be considered to exist when:
The mortgage loan preferably sets forth conditions of default for the borrowers 12 pertaining to the mortgage loan. The default conditions may include, for example, failure of the borrowers 12 to pay any scheduled payment amount when due, failure of the borrowers 12 to pay any other amounts from time to time owing under the mortgage loan within ten days after written notice to the borrowers 12, failure to comply with financial reporting requirements, any breach or default of certain covenants of the mortgage loan, etc. The mortgage loan also preferably sets forth remedies for such default conditions, including acceleration, foreclosure against all or part of the mortgaged property, the right to seek a deficiency judgment, exercise of remedies under the guaranty, etc.
According to various embodiments, the present invention is directed to issuing the securities 18. Also, other embodiments are directed to selling and/or buying the securities 18, including as part of the initial offering by the issuer 16 or in the after-market. Also, various embodiments of the present invention are directed to underwriting (by one or more underwriters) the issuance of the securities 18.
The computer system 80 may be implemented as one or a number of networked computing devices, such as servers, personal computers, mainframes, workstations, laptops, etc. The memory 84 may be any computer readable medium, including RAM or ROM.
While various embodiments have been described herein, it should be apparent that various modifications, alterations and adaptations to those embodiments may occur to persons skilled in the art with attainment of at least some of the advantages. The disclosed embodiments are therefore intended to include all such modifications, alterations and adaptations without departing from the scope of the embodiments as set forth herein.